In my view one of the most serious gaps in the Islamic finance market is the absence of Shariah compliant annuities.
I wrote about the need in my 2016 article "The need for Shariah compliant annuities." I returned to the subject in my December 2021 column for the magazine "Islamic Finance News" with my explanation for their absence from the Islamic finance market. You can read it below.
If there are some Shariah compliant annuity offerings which I have failed to find, I would appreciate readers sending me precise details. You can use the Disqus comments facility below, or email me as explained on the "Contact me" page.
My “Letter from Amin” [my website page linked above] in the 13 April 2016 issue of Islamic Finance News explained the need for Shariah compliant retirement annuities that you could purchase with your accumulated pension fund once you retire. As I wrote:
“Annuities are particularly appropriate for individuals with relatively lower pension fund amounts or other savings who cannot afford to have the continuing investment risk throughout retirement which the second alternative [leaving the pension fund invested and making periodic cash withdrawals as the retiree requires money to spend] entails.”
Almost six years later, when I searched, I could not find anyone actually offering such annuities. Why is this?
The most obvious answer is the challenge of devising a Shariah compliant structure. On the face of it, handing over money in exchange for the promise to pay you a fixed income each year until you die looks like a contract of “riba” (impermissible increase). Riba is of course prohibited in Islam.
However, many people have proposed structures for providing retirement annuities that would be Shariah compliant. I could even construct one myself, using a takaful model.
In the same way that a takaful fund can pay you if the unfortunate event of dying occurs, it should be able to pay you every twelve months if you are suffering from still being alive! One is the mirror image of the other, and both create financial needs you need protecting against.
Indeed, commercially a takaful operator which already provides death cover is a natural provider of annuities, since the two products have naturally offsetting risks if there is a change in mortality experience. If people live longer than expected, the extra losses on the annuity business should be matched by greater profits on the death cover business.
Instead, I believe that the absence of annuity providers arises from a number of commercial factors:
I don’t see this changing in the short run. Even in the conventional finance market, retirement annuities of the type discussed above are withering away as fewer and fewer people buy them.
Mohammed Amin is an Islamic finance consultant and former tax partner at PwC in the UK.